Today’s News 29th January 2016

• Chaos Ensues After Nikkei Reports Bank Of Japan Discussed Negative Interest Rate Policy

  Just minutes before The BoJ is due to release its statement, USDJPY and Nikkei 225 went haywire around 2220ET as Nikkei news dropped a headline about NIRP discussions taking place at The BoJ. This is not the BoJ statement but has sparked chaos in Japanese (and all carry trade linked markets). We can only assume this was some well-placed strawman for The BoJ statement enabling Kuroda to get a glimpse of what is possible.

  Total chaos broke out ahead of the BoJ Statement…as Nikkei News dropped this headline…

  • *BOJ DISCUSSES NEGATIVE INTEREST RATE POLICY, NIKKEI SAYS

  BOJ discusses introduction of negative interest rates today at policy meeting, Nikkei reports.

  • Negative rates discussed due to growing concern of downward pressure on Japan economy and CPI because of cheap crude oil, China slowdown: Nikkei

  Nikkei 225 is up 500 points on the news, USDJPY +50 pips

  

   

  Some context for that move…

  

   

  Having given up all its gains since the last QQE update…

  

   

   

  G622

  

  

  

  

  

• Americans Really, Really Hate The Government

  Submitted by Michael Snyder via The Economic Collapse blog,

  If there is one thing that Americans can agree on these days, it is the fact that most of us don’t like the government.  CBS News has just released an article entitled “Americans hate the U.S. government more than ever“, and an average of recent surveys calculated by Real Clear Politics found that 63 percent of all Americans believe the country is heading in the wrong direction and only 28 percent of all Americans believe that the country is heading in the right direction.  In just a few days the first real ballots of the 2016 election will be cast in Iowa, and up to this point the big story of this cycle has been the rise of “outsider” candidates that many of the pundits had assumed would never have a legitimate chance.  Donald Trump, Ted Cruz and Bernie Sanders have all been beneficiaries of the overwhelming disgust that the American people feel regarding what has been going on in Washington.

  And it isn’t just Barack Obama or members of Congress that Americans are disgusted with.  According to the CBS News article that I referenced above, our satisfaction with various federal agencies has fallen to an eight year low…

  A handful of industries are those “love to hate” types of businesses, such as cable-television companies and Internet service providers.

   

  The federal government has joined the ranks of the bottom-of-the-barrel industries, according to a new survey from the American Customer Satisfaction Index. Americans’ satisfaction level in dealing with federal agencies –everything from Treasury to Homeland Security — has fallen for a third consecutive year, reaching an eight-year low.

  So if we are all so fed up with the way that things are running, it should be easy to fix right?

  Unfortunately, things are not so simple.

  In America today, we are more divided as a nation than ever.  If you ask 100 different people how we should fix this country, you are going to get 100 very different answers.  We no longer have a single shared set of values or principles that unites us, and therefore it is going to be nearly impossible for us to come together on specific solutions.

  You would think that the principles enshrined in the U.S. Constitution should be able to unite us, but sadly those days are long gone.  In fact, the word “constitutionalist” has become almost synonymous with “terrorist” in our nation.  If you go around calling yourself a “constitutionalist” in America today, there is a good chance that you will be dismissed as a radical right-wing wacko that probably needs to be locked up.

  The increasing division in our nation can be seen very clearly during this election season.

  On the left, an admitted socialist is generating the most enthusiasm of any of the candidates.  Among many Democrats today, Hillary Clinton is simply “not liberal enough” and no longer represents their values.

   

  On the other end of the spectrum, a lot of Republican voters are gravitating toward either Donald Trump or Ted Cruz.  Both of those candidates represent a complete break from how establishment Republicans have been doing things in recent years.

  Now don’t get me wrong – I am certainly not suggesting that we need to meet in the middle.  My point is that there is absolutely no national consensus about what we should do.  On the far left, they want to take us into full-blown socialism.  Those that support Donald Trump or Ted Cruz want to take us in a more conservative direction.  But even among Republicans there are vast disagreements about how to fix this country.  Establishment Republicans greatly dislike both Trump and Cruz, and they are quite determined to do whatever it takes to keep either of them from getting the nomination.  The elite have grown very accustomed to anointing the nominee from each party every four years, and so the popularity of Trump and Cruz is making them quite uneasy this time around.  The following comes from the New York Times…

  The members of the party establishment are growing impatient as they watch Mr. Trump and Mr. Cruz dominate the field heading into the Iowa caucuses next Monday and the New Hampshire primary about a week later.

   

  The party elders had hoped that one of their preferred candidates, such as Senator Marco Rubio of Florida, would be rising above the others by now and becoming a contender to rally around.

  The global elite gathered in Davos, Switzerland are also greatly displeased with Trump.  Just check out some of the words that they are using to describe him…

  “Unbelievable“, “embarrassing” even “dangerous” are some of the words the financial elite gathered at the World Economic Forum conference in the Swiss resort of Davos have been using to describe U.S. Republican presidential frontrunner Donald Trump.

   

  Although some said they still expected his campaign to founder before his party picks its nominee for the November election many said it was no longer unthinkable that he could be the Republican candidate.

  The truth is that the Republican Party represents somewhere less than half the population in the United States, and today it is at war with itself.  Supporters of Trump have a significantly different vision of the future than supporters of Cruz, and the establishment wing wants nothing to do with either candidate.

  A lot of people seem to assume that since Trump is leading in the polls that he will almost certainly get the nomination.

  That is not exactly a safe bet.

  It is my contention that the establishment will pull out every trick in the book to keep either him or Cruz from getting the nomination.  And in order to lock up the nomination before the Republican convention, a candidate will need to have secured slightly more than 60 percent of all of the delegates during the caucuses and the primaries.

  The following is an excerpt from one of my previous articles in which I discussed the difficult delegate math that the Republican candidates are facing this time around…

  It is going to be much more difficult for Donald Trump to win the Republican nomination than most people think.  In order to win the nomination, a candidate must secure at least 1,237 of the 2,472 delegates that are up for grabs.  But not all of them will be won during the state-by-state series of caucuses and primaries that will take place during the first half of 2016.  Of the total of 2,472 Republican delegates, 437 of them are unpledged delegates – and 168 of those are members of the Republican National Committee.  And unless you have been hiding under a rock somewhere, you already know that the Republican National Committee is not a fan of Donald Trump.  In order to win the Republican nomination without any of the unpledged delegates, Trump would need to win 60.78 percent of the delegates that are up for grabs during the caucuses and primaries.  And considering that his poll support is hovering around 30 percent right now, that is a very tall order.

   

  In the past, it was easier for a front-runner to pile up delegates in “winner take all” states, but for this election cycle the Republicans have changed quite a few things.  In 2016, all states that hold caucuses or primaries before March 15th must award their delegates proportionally.  So when Trump wins any of those early states, he won’t receive all of the delegates.  Instead, he will just get a portion of them based on the percentage of the vote that he received.

   

  In 2016, more delegates will be allocated on a proportional basis by the Republicans than ever before, and with such a crowded field that makes it quite likely that no candidate will have secured enough delegates for the nomination by the time the Republican convention rolls around.

  If no candidate has more than 60 percent of the delegates by the end of the process, then it is quite likely that we will see the first true “brokered convention” in decades.

  If we do see a “brokered convention”, that would almost surely result in an establishment candidate coming away with the nomination.  That list of names would include Bush, Rubio, Christie and Kasich.

  And if by some incredible miracle either Trump or Cruz does get the nomination, the elite will move heaven and earth to make sure that Hillary Clinton ends up in the White House.

  For decades, it has seemed like nothing ever really changes no matter which political party is in power, and that is exactly how the elite like it.

  Our two major political parties are really just two sides of the same coin, and they are both leading this nation right down the toilet.

  

  

  

  

  

• Small Arms Sales Skyrocket In Germany In Reaction To Refugee Attacks

  As we’ve documented on a number of occasions over the past three or so months, Germans have a newfound love for pepper spray.

  In November, we noted that frightened Germans fearing a “foreign invasion” from the Mid-East, were rushing to stock up on what amounts to migrant-be-gone aerosol just in case a refugee should get any designs on trying to get too close.

  “There is fear” explains Kai Prase, managing director of DEF-TEC Defense Technology GmbH in Frankfurt, one of the major producers of repellents. “For the past six to seven weeks we have been practically sold out.”

  Yes, “there is fear”, and that fear only grew after New Year’s Eve when dozens of women reported being sexually assaulted by “gangs” of drunken “Arabs” in Cologne, among other cities.

  The New Year’s incidents triggered even more interest in deterrent technology and before you knew it, Germans were Googling “pepper spray” like there was no tomorrow:

  

  Of course, as we noted earlier this month, pepper spray isn’t much good against a Kalashnikov and besides, mace doesn’t sound like nearly as much fun as a “non-lethal gas pistol,” a replica firearm that shoots tear gas cartridges. 

  “People no longer feel safe, otherwise they would not be buying so many products here,” a seller in North-Rhine Westphalia told Deutsche Welle who adds that the seller, like many of his colleagues, has been moving “an average of three times as many alarm, gas, and signal guns as he was prior to the attacks that took place in Cologne on New Year’s Eve.” 

  Although you can’t go out and buy an AK-47 in Germany, you can obtain a so-called “small arms permit”, which gives you the right to own all sorts of fun things like the aforementioned gas pistol. For those who aren’t familiar with the weapon, here’s a helpful video (note the 1:57 mark when we get a look at “a person running with a… a club at a person who draws and fires on them”): 

  There you go. You can shoot someone in the face and not kill them as long as you “have a spotless record ” when you apply for the permit.

  “There has been an increase of at least 1,000 percent or more in Google search queries for gun permits since January,” Felix Beilharz, a social media expert from Cologne told DW.

  Brauchen die Menschen mehr Schutz? #waffenschein #pfefferspray und #selbstverteidigung nach #koelnhbf Google sagt ja pic.twitter.com/gsnzhXHGJM

  — Dejan is Available (@a_placeholder) January 8, 2016

  And that’s not all.

  Germans are also getting more interested in self defense courses. “Currently, those offering self-defense courses are also profiting from the concerns and fears of many German citizens. Many such courses are booked out for the next several weeks – that was not the case a year ago,” DW says.

  “Several social media entries tagged with #Koelnbhf (Cologne train station) were advertising “efficient martial arts training,” RT adds.

  Here’s a tweet that pretty much sums up the mood in Germany:

  Fit und Schlagfertig für den Alltag!
  – #Selbstverteidigung und mehr…
  Zusatztermine: https://t.co/i3g528ofnw pic.twitter.com/XGHFSAkGDf

  — Cosimo My (@cosimo_my) January 25, 2016

  So perhaps Anders Rasmussen – the prevention specialist at the Danish Crime Prevention Council who we mocked earlier today – was correct to say that a move to make non-lethal deterrents legal “may quickly develop into a sort of armed competition between civilians,” as there does indeed appear to be a non-lethal arms race going on in Germany.

  And just like that, Angela Merkel’s move to take in 1.1 million asylum seekers has turned the streets of Germany into the Wild West, where every man, woman, and child is carrying some manner of weapon.

  The fine for pepper spraying a would-be assailant in Denmark is 500 kroner. Given the preponderance of Danes who are sneaking away to Germany to buy non-lethal weapons, we wonder what the penalty is for shooting an attacker in the face with a tear gas cartridge at point blank range.

  

  

  

  

• Why 2,667 Is The Most Important Number In China Tonight

  Barring some miraculous 8% epic melt-up in the afternoon session – go down as the worst ever January for Chinese stocks. While that is a big enough deal, for now the 24%-plus plunge is the worst of any month since Lehman’s fallout in October 2008. However, it is close… if the Shanghai Composite closes below 2667.50 today, January 2016 will become the worst month for Chinese stocks since 1994… quite a feat in a “stable” and manipulated market.

  Worst January ever…

  

   

  “Worse since Lehman” or Worst in 21 years?

  

   

  2667.50 is all that matters…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Trump vs Fox News: Live Webcast From Donald Trump's "Alternative" Event

  If Fox asked Facebook to tabulate the number of viewers at tonight’s GOP republican debate in Des Moines, Iowa, the answer would probably be over 1 billion. The reality is that most potential viewers will likely be hijacked to tonight’s “alternative” event, the one taking place just a few miles away at Drake University where Donald Trump – why is boycotting the Fox News debate – will address Wounded Warriors & Veterans but what he will really do is school the rest of the republican field how to control the media narrative and to remain constantly in the spotlight especially when he is nowhere near it.

  As WSJ writes, Donald Trump‘s attempt to steal some of the limelight from the Fox News debate drew thousands to the campus of Drake University, a few miles away from where the official debate is being held. The line included hundreds of Drake students, many of whom said they were just curious to see Mr. Trump up close, but also some students who plan to caucus for the Republican front-runner on Monday night. However, many of the young people outside won’t get the chance to see him because the building only holds 700 or so people, leaving many standing outside in the cold.

  Meanwhile, as Trump does his event, seven candidates are set to debate, starting at 9 p.m. ET. Here is what the lineup looks like (including Trump).

  

  Few will watch this particular event.

  Live webcast below from the event spearheaded by the republican who is now leaps and bounds ahead of the competition in Iowa, New Hampshire and South Carolina.

  

  

  

  

  

• F(r)actions Of Gold

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The simple fact of the matter is that gold is no longer money and hasn’t been treated that way in decades. It is a frustrating and often woeful outcome, but deference isn’t a reason to color judgement. As an investment, which is more like what gold has become, it isn’t all that straight, either. Gold behaves in many circumstances erratically; often violently so. In 2008, gold crashed three times; but it also came back (and then some) three times. The metal remains stuck in some orthodox limbo of duality, sometimes acting an investment while at others, more rarely, as almost reclaiming its former status.

  The junction of that dyad format is wholesale collateral. It is a difficult and dense topic because it plumbs the very depths of the wholesale arrangement – factors like leasing, swaps and collateralized lending through binary bespoke arrangements. It is there that I think it helps to form the narrative, however, starting by reviewing what the BIS was up to in late 2009 and early 2010. I am going to borrow heavily from an article I wrote in April 2013 that describes the events in question but this is one of those times when you should read the whole thing.

  Back in July 2010, the Wall Street Journal caused some commotion when it happened to notice in the annual report for the Bank for International Settlements the sudden appearance of gold swap operations to the tune of 346 tons. Subsequent investigation by media outlets, including the Financial Times, reported that the BIS had indeed swapped in 346 tons of gold holdings from ten European commercial banks. That was highly unusual in that gold swaps are typically conducted between and among central banks.

   

  Included in that list of commercial banks were, according to the Financial Times, HSBC, BNP Paribas and Société Générale. The timing of the swaps was pinned down to sometime between December 2009 and January 2010 – just as the world was getting reacquainted with the Greek Republic.

  In other words, “dollar” problems had been reborn despite QE1 and ZIRP (and the follow-on programs at the ECB, SNB and elsewhere) because European banks, in particular, had swapped “toxic” MBS collateral for “toxic” PIIGS sovereigns. Now, like MBS before it, even government bonds were becoming non-negotiable in repo (haircuts) and derivative collateral. Stuck not long after the last crisis, banks were in a tight spot since no central bank appeared ready to commit to another great effort so soon risking what they found a fragile but fruitful early revival. Banks then turned to the BIS in what only can be interpreted as great desperation for survivorship.

  The amount of physical bullion purchased by private investors in the decade of the 2000’s had ended at custodial accounts in various commercial banks. Some of these investors were discerning and suspicious enough to demand allocated accounts. Some were not. Unallocated gold can get pooled into a house custodial account with rights over custody being retained by the bank, not the investor. In this case, said investor owns not gold, but rather a bank liability payable in gold.

   

  Unallocated gold in pooled accounts residing in a bank with growing funding stress makes for a rather easy liquidity target. The gold market offers depth in a broad range of currencies. Gold markets are also very well interconnected, between the physical market in London and various paper markets, particularly the CME in Chicago.

   

  In the case of the large gold swap in 2010, the commercial banks accessed dollar liquidity “off-market” since the BIS simply held the bullion in its custody. Being accustomed to holding physical gold, it did have $23 billion, about 1,200 tons already on account, meant no additional hassle. The BIS surely incurred storage and administrative costs, but they would easily be absorbed by the interest rate the banks would pay on this collateralized loan (essentially the gold swap in this case amounted to a dollar denominated loan with gold bullion held as collateral by the BIS).

  The reason that customers’ unallocated gold was such an “easy liquidity target” for banks in tight spots was that gold in that position had become a liability of the bank rather than being construed, as it should have under purely monetary terms, in constructive bailment. Unallocated gold was nothing more than another kind of deposit account; you didn’t actually own gold but possessed instead a financial claim on gold through the bank. Under bank liability, the bank may do what it wishes so long as it presumes meaningful care in being able to deliver any physical gold (not specific bars) upon convertibility.

  On December 7, 2011, the Financial Times reported that:

  Gold dealers said that banks – primarily based in France and Italy – had been actively lending gold in the market in exchange for dollars in the past week

  There were rumors (admittedly unsubstantiated to this day) that a large bank (or two) in France was to be declared insolvent on December 8; only a week earlier, on November 30, 2011, the Fed had announced a sudden alteration to its dollar swap lines with five reciprocating central banks, both reducing the cost (OIS +50 instead of OIS +100) but more intriguingly mentioning “temporary bilateral swap agreements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.” Then on December 8, the ECB announced their trillion, the LTRO’s.

  On November 30, 2011, the Fed finally relented to unlimited dollar swaps at a low premium (OIS + 50). But still banks were looking to gold leases. So much so that we have no idea at what rates these transactions were occurring. The same Financial Times article cited above quoted “traders” as indicating:

   

  “…few, if any, banks were likely to receive the published rates since they have been skewed in recent months by a widespread reluctance among bullion banks to take gold for dollars.”

   

  The implication here is that “markets” had no reasonable idea how desperate for dollars some banks had become. It is no surprise in that context that the very day after the Financial Times published that article the ECB announced its massive lending facilities through the LTRO’s. In conjunction with the Fed’s swap lines, the two central banks, coordinating with other central banks, aimed to end the liquidity crisis through massive money stock means.

  The relevance of this particularly unnoticed angle in the 2011 re-crisis is the behavior of gold since that point. As noted a few days ago, gold has only come lower as if to signal the “deflationary” impulse of the imploding eurodollar; and that makes sense as that particular time and flow of circumstances was in many ways convincing that there was never going to be a possible pathway to recreating or revisiting the pre-crisis financial system – as every central bank intended and still intends to this day.

  What we don’t know, probably can’t know, is how much gold was traded and where it all ended up during that time. In the more traditional setup of gold swaps, the practical effect was for producers to dislodge stored gold sitting in central bank vaults around the world. It was win-win for central banks because they got to both actualize gold into an interest-earning investment while also, through quite dubious accounting rules, never admitting that gold was gone (all activity contained under a single line item: gold and gold receivables; and you never knew how much was the latter and how little the former).

  The 2011 episode with the BIS reversed in many ways the causal flows of physical, assuming it was physical at all. Commercial banks that had been receiving customer deposits of the metal were now turning it over the central bank of central banks out of “dollar” (and euro, likely even euroeuro) desperation. While we can’t figure out where the physical gold ends up, we can at least recognize the fingerprints of the gold collateral/liquidity arrangement in various forms such as the stretching of claims on gold in “physical” markets such as COMEX; the more gold swaps churn physical or its approximates, the more opportunity there was to create “paper supply.”

  This is the hard part for those who appreciate real money, as money is itself an asset without liability. But here are banks and central banks abusing gold to turn it into just another agent of rehypothecation – further distorting capitalism’s foundational respect for property rights into more financial terms that obey no such constraint (MF Global being the institution caught at it). I wrote about this in May 2013, explaining why, in general, gold leasing in these kinds of situations is negative on gold price:

  The accounting rules are such that the central bank continues to hold “gold” on its books despite the leasing arrangement that moved that actual physical metal into the marketplace. Thus the market has actual gold sold into it while central banks report no loss of supply (under the accounting line “gold and gold receivables”). Since these are opaque transactions, nobody really knows what has been leased out and what actually remains.

   

  Gold lending takes a similar form. Banks typically hold client gold in unallocated accounts – this is intentional since unallocated accounts have smaller fees and clients have not been educated as to the legal distinctions. Unallocated gold is a liability of the bank; the client continues to hold title to physical bullion, but that is in the form of a “paper” promise by the bank to deliver future gold. Often, the agreement that creates the unallocated arrangement even allows for the bank custodian to settle the client claim in cash under certain circumstances.

   

  Therefore, the bank can use the unallocated metal toward its own purposes, in exactly the same way that prime brokers rehypothecate hedge fund credit holdings in margin accounts. In a gold lending relationship, the bank uses the unallocated gold as collateral for cash (in whichever currency is needed, which is one of the appeals of using bullion for collateral). Now, the gold is in the hands of an intermediary that, apart from any haircut set with the borrowing bank, is at price risk. The cash lending bank will either sell the gold outright, since it only has to replace metal at the end of the agreement, or hedge its collateral position (based on the cost of selling futures).

  That would also hold for central bank claims in the prevailing leg of an earlier swap arrangement. Like rehypothecated treasury securities in repo, all that matters is balance sheet ledgers between counterparties agree on balance at the end of the day; each and every day. So long as that happens, there are no cascading triggers that reveal the fractioning.

  While my intent in revisiting the gold crash in 2013 was to add to the weight of financial warnings that have occurred almost regularly since then about the fate of the global “dollar” system, it was a ZeroHedge article from yesterday that brought it further into focus – particularly the current unknown (out)flow of physical metal that “somehow” left undisturbed the futures volume (the paper gold). From that article:

  This means that the ratio which we have been carefully tracking since August 2015 when it first blew out, namely the “coverage ratio” that shows the total number of gold claims relative to the physical gold that “backs” such potential delivery requests, – or simply said physical-to-paper gold dilution – just exploded.

   

  As the chart below shows – which is disturbing without any further context – the 40 million ounces of gold open interest and the record low 74 thousand ounces of registered gold imply that as of Monday’s close there was a whopping 542 ounces in potential paper claims to every ounces [sic] of physical gold. Call it a 0.2% dilution factor.

  Is that the anguishing end of years of “dollar” liquidity being literally swapped for physical and paper gold? Much more so the latter? It is, of course, impossible to determine but there are so many corroborating factors that the suggestion is at the very least compelling; and thus why gold has been warning about the eurodollar system since 2013 and really 2011. The fact that gold had so much collateral appeal at that time speaks to that very notion; the artificial MBS “toxic waste” that stood for it during the ravenous runup to 2007 was no sustainable substitute for a small monetary system, let alone the global predicate for global finance and trade.

  Pre-2011 (Gold and Comex Cover were highly correlated)

  

   

  Post-2011 (Gold and Comex Cover were almost perfectly anti-correlated)

  

  [ZH: Something 'broke' in the gold complex when China devalued]

  To that fact, banks were forced throughout 2007-09 and again in 2011 (2013 too? How about 2015?) to alternate funding means no matter how distasteful (to the eurodollar practitioner, gold stands against all of it). Wholesale banking in its purest distillation is a system that seeks to fraction every kind of liability no matter original intent or even customer intent (banks are the central focus, where their balance sheet and financial resources stand as “money”) – to the point of fractions upon fractions; rehypothecations of rehypothecations. It went so badly that the system seems to have repurposed gold once more, the only asset where fractioning is still sensitive enough to signal the desperation. In other words, if the eurodollar and wholesale banking system had been sliced to such a thin margin again by 2011 so as to so heavily depend on the modern duality of gold, it not only would not survive it literally could not survive. The paper dilution we see now may just be that judgement finally seeking open admission.

  

  

  

  

  

• Goldman Banker Who Set Up Slush Fund For Malaysian PM Takes "Personal Leave"

  On Tuesday we learned that Malaysian PM Najib Razak won’t have too much explaining to do domestically when it comes to why Saudi Arabia decided in 2013 to make a $681 million “donation” to his personal bank account.

  Najib’s political opponents have accused the PM of deliberately undermining an investigation into where the money came from. The public has also angrily asked for transparency and in August, street protests led by former PM Mahathir Mohamad were held in Kuala Lumpur. “I don’t believe it is a donation,” Mahathir said at the time. “I don’t believe anybody would give [that much], whether an Arab, or anybody.”

  No, probably not.

  In short, no one is buying Najib’s story except, apparently, Malaysia’s top prosecutor Attorney General Mohamed Apandi who ordered the probe into the transfer closed earlier this week.

  Like many other Malaysians, Mahathir has some questions for Apandi and Najib. Here are a few:

  • “It seems there was a letter by a Saudi stating that a sum of US$681 million or RM2.08 billion was a donation for the PM’s contribution to the fight against Islamic terrorists. Who is this Arab?”
  • “How does he have the huge sum of money to give away?”
  • “What is his business?”
  • “What is his bank?”
  • “How was the money transferred?”
  • “What documents prove these?”
  • “Just a letter from a deceased person or some non-entity is enough for the A-G?“

  And some more:

  • “How and when was this done?”
  • “We are told the balance is frozen by Singapore. Can Singapore explain the unfreezing and the delivery back to the Saudis?”
  • “Or does Singapore also believe in the free gift story, the letter and the Saudi admission?”

  All great questions. Questions which will likely never be answered. 

  As those who have followed the 1MDB story will recall, the fund has strong ties to Goldman and more specifically to Tim Leissner, chairman of the bank’s Southeast Asia ops. 

  1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing $11 billion to fund questionable acquisitions. $6.5 billion of that debt came from three bond deals underwritten by Goldman and orchestrated by Leissner, who is married to hip hop mogul Russell Simmons’ ex-wife Kimora Lee who, in turn, is good friends with Najib’s controversial wife Rosmah Manso.

  

  What Goldman did, apparently, is arrange for three private placements, one for $3 billion and two for $1.75 billion each back in 2013 and 2012, respectively. Goldman bought the bonds for its own book at 90 cents on the dollar with plans to sell them later at a profit.

  Now, just as Najib is cleared by Malaysia’s top prosecutor and amid multiple 1MDB investigations unfolding in other countries, Tim Leissner is taking a leave of absence from Goldman and is leaving Singapore for Los Angeles. 

  “Leissner, who has been with Goldman Sachs for almost 18 years and was most recently Singapore-based chairman of its Southeast Asia operations, remains an employee,” Bloomberg reports. “The bank’s dealings with the country’s state-owned investment company, 1Malaysia Development Bhd., drew public scrutiny because of the high fees Goldman was paid.”

  “His departure comes as Najib Razak, Malaysia’s prime minister, fights to extricate himself from a donations scandal alleged to be linked to the investment fund, known as 1MDB,” FT adds. “[Leissner’s] close relationships with top officials in Kuala Lumpur produced what one executive described as a ‘golden period’ for the bank.”

  The ubiquitous “people familiar with the matter” say Goldman was unhappy with the amount of time Leissner spent in Los Angeles where his wife is busy building a fashion business.

  Whether or not Leissner’s leave and decision to high tail it out of Singapore has anything to do with the 1MDB scandal is an open question, but the timing certainly looks curious. 

  Incidentally, Leissner will have plenty of places to stay in L.A.

  Najib’s stepson and Jho Low (described as a “close family friend”) own a $39 million mansion on Oriole Drive in the Hollywood Hills in Los Angeles, the L’Ermitage Hotel in Beverly Hills, a home in Beverly Hills known as the pyramid house for a gold pyramid in its garden, as well as other properties in the Los Angeles area.

  

  

  

  

  

• George Soros Finally Suspends His Lifelong War Against Russia

  Submitted by Eric Zuesse via Strategic-Culture.org,

  On January 21st, George Soros, who has throughout his life been passionately opposed not just to communism but also to Russia, has finally stated in a Bloomberg News interview at the World Economic Forum, that the United States (and possibly the EU, but he says that the EU is in terrible economic shape itself) must now fund a new Marshall Plan for all of Europe, including, this time, even his bête noire: Russia.

  However, is he ending, or merely suspending, his lifelong war against Russia? Let’s look at the evidence, including the background for his comments here – the crucial background in order to understand his statement is provided in the links here:

  Previously, he had been urging both the United States and the EU to pump variously $20 billion (in some of his articles) to $50 billion (in others) more into Ukraine’s war to seize back control over Ukraine’s former regions of Crimea and of Donbass, both of which had voted overwhelmingly (75 % in Crimea and over 90 % in Donbass) for the democratically elected Ukrainian President, Viktor Yanukovych, whom Obama overthrew on 20 February 2014 in a bloody staged coup whose gunmen were mainly from Ukraine’s two racist-fascist or ideologically Nazi parties and were all paid by the US via laundered funds through the CIA. Those two regions of Ukraine are strongly pro-Russian and anti-Nazi – they were anti-Nazi in World War II, and are anti-Nazi today.

  However, now that the US-led effort to re-arm the Ukrainian government that it had installed, and to enable them to go to war yet a second time, attempting to seize (or reabsorb) Crimea and Donbass, has failed, and US President Barack Obama has thus at least temporarily given up in all but rhetoric his determination to enable Ukraine to crush those regions, George Soros is stepping back in.

  Soros had, himself, via his International Renaissance Fund, helped to finance the overthrow of Yanukovych. He is now urging that the US (and maybe Europe) help Europe including Russia, to recover from the damages that the US had imposed upon that broader Europe – imposed by means of Obama’s invasions and coups in not only Ukraine but also in the Middle East. (After all, most of the refugees into Europe come from America’s invasions of Iraq, Libya, and Syria, and from the support of jihadists there by America’s Saudi, Qatari, and UAE allies. The refugee-crisis is generated by America and its allies.) Soros says that the fleeing refugees from the Middle East into Europe will break the EU unless stopped, and that US taxpayers (and maybe EU taxpayers) thus now need to fund the salvation of all of those countries which the US – largely at Soros’s own urging and with his help – has all but destroyed. Perhaps he just wants Western taxpayers to bail him out.

  His comment attributes, as being the precedent for his current support of a taxpayer-bailout for Europe including Russia, his prior, 1989, support of a bailout of Eastern Europe including Russia. However, at that time, he was looking for public funds to create debts that those then-communist nations would have toward Western taxpayers. His proposal was rejected, because democracy was, at that time, strong enough in the West, so that the public’s rejection of it caused his proposal to be politically impossible to achieve. The situation is drastically different now, after the Harvard Economics Department and George Soros guided the Russian government into a ‘capitalism’ that’s crony-capitalism or «fascism», from which Harvard University and George Soros extracted billions in giveaways of state property from formerly communist countries that were insider-dealt to not only Russia’s and Ukraine’s (etc.) insiders, but also to America’s, including especially Soros himself (and that link is also here). That link presents the great Janine Wedel reporting that, as a result of one particular insider-rigged auction, «H.M.C. [Harvard Management Company] and Soros became significant shareholders in Novolipetsk, Russia's second-largest steel mill, and Sidanko Oil, whose reserves exceed those of Mobil».

  Ukraine is one of the countries that was stripped this way, and it more recently was taken over by the United States, with Soros’s help, and stripped even more.

  

  The post-Soros, post-Obama, coup-government of Ukraine is essentially bankrupt after all of their ‘anti-corruption’ verbiage has collided with their total-corruption policies in Ukraine, just as had happened under Yeltsin in Russia, so that, notwithstanding Soros’s urgings for $20B+ of Western taxpayer funds to be contributed to that government, it simply won’t happen. Soros therefore now is urging his new proposal for a «Marshall Plan», not only to get Eastern Europe deeper into debt to Western governments, but, perhaps, also to enable Soros’ own investments in Eastern Europe (including Russia) to turn profits for him. Only with taxpayer assistance can such investments now be made profitable.

  That’s the problem with private-investor meddling in foreign policies: governments become controlled by international aristocrats.

  *  *  *

  Here is the transcript of this brief interview-segment, from a Bloomberg, which cannot be accurately understood without reference to the links that were provided in that restatement here of his statement – those links document the reality behind what he is here asserting:

  SOROS: The European Union is in an existential crisis, and it needs to get out of that because of the migration problem [which] is effectively distressing the European Union – it’s falling apart, and that’s a time when you need to have a major initiative, a Marshall Plan. It’s absolutely appropriate. It’s amazing that it comes from Schaivo, who has been one of the proponents of Bundesbank orthodoxy, but I have been in favor of it all along. I was propose[ing] a Marshall Plan for Eastern Europe more than twenty-five years ago [before the end of the USSR], in 1989 in Potsdam, when Potsdam was still in Eastern Germany, and I said this would be a Marshall Plan for Eastern Europe including Russia, and it should be financed by the Europeans for a change, and actually led by the – representative, who started laughing, and the front of the Algemeine [Zeitung] reported that my proposal was greeted with amusement. Now I think this proposal should not be treated with amusement. This should be taken very seriously. It’s going to have a very difficult time passing, because there’s a lot of dissension now, part of the disintegration, but I think it needs public and enthusiastic support. But I think that most people know that something has gone catastrophically wrong and it has to be put right.

   

  INTERVIEWER: Is there a danger of break-up. Last year we were worried about Greece, what should we be worried about this year?

   

  SOROS: I think Greece is still a problem. It’s the one problem that has no solution, because it has been so messed-up that you can only muddle along. But there is no solution, and actually that problem is now coming to the boiling point again. You can see it on the face of the press, but [it] is not a major problem in the scheme of things.

  

  

  

  

  

• Here Is The Reason For January's Selloff: China's January Outflows Soar To Second Highest Ever

  While China’s currency devaluation has, alongside the price of commodities, become one of the two key drivers of market volatility and tubulence around the globe, when it comes to risk, one far more important Chinese metric is the actual amount of capital that leaves the nation.

  The reason for this is that as explained over the weekend, in a world where Quantitative Tightening by EMs and SWFs has emerged as a powerful counterforce to Quantitative Easing – or liquidity injections – by developed central banks, what matters for global risk levels is the net effect of these two opposing money flows.

  

  Of all the global “quantitative tighteners”, the biggest culprit is China, which has seen over $1 trillion in reserve selling since the summer of 2014, the direct result of a virtually identical amount in capital outflows.

  Furthermore in for a “closed’ Capital Account system like is China, the selling of FX reserves is a direct function of capital outflows, so the only real data needed to extrapolate not only the matched reserve selling and thus Quantitative Tightening, but also the direct impact onglobal risk assets, is how much capital outflow has taken place.

  This takes place in one of two ways: by relying on official Chinese historical data, or by estimating how much outflows take place on a concurrent basis, thus allowing one to estimate how much capital is flowing out in real time. Indicatively, China’s SAFE released onshore FX settlement data for the whole banking system (PBoC+banks), suggesting some $97bn of FX outflows in Dec, which is broadly in line with the fall in official reserves.

  But much more important is the question what is taking place right now, the answer to which can either wait until SAFE releases January data in several weeks… or rely on day to day estimates of outflows in the form of central bank FX intervention. 

  Luckily, we have just that.

  According to a Goldman report, so far in January “there has been around $USD 185bn of intervention (with the recent intervention predominantly taking place in the onshore market)” split roughly $143 billion on the domestic side and $42 billion on the offshore Yuan side.

  

  This would make January the month with the second largest amount of intervention since August 2015, and thus the second highest month of capital outflows, and would explain the ongoing deterioration across global asset classes as China’s various FX reserve managers have been forced to sell not just government bonds but equities as well. 

  Goldman also calculates that “total intervention over the last 6 months, using our estimates, sums to USD 775bn.” Run-rating this amount would suggest that nearly $1.6 trillion in Quantiative Tightening is taking place just due to China’s attempts to stem capital flight. This number excludes the hundreds of billions in reserves that all other petrodollar and EM nations have to liquidate as well to prevent the rapid devaluation of their own currencies as the world remains caught in the global dollar margin call we first explained in early 2015.

  The implications from this are two-fold:

  • For the selling culprit, responsible for the recent market weakness look no further than China, whose reverse “flow” has been responsible for the terrible start to 2016 capital markets.
  • For the Beijing politburo, halting capital outflows is becoming a matter of life or death, because there are only so many liquid reserves China can liquidate before it enters dangerous territory; worse, the less the reserves, the greater the desire will be on behalf of the local population to take their money and run.

  Of course, China’s rabid defense of further capital outflows means that its original intent, to devalue the Yuan to a degree that boosts its economy via exports, has been put on hiatus, or in other words China is trapped, and instead of an external rebalancing it is forced to boost its economy in the one way it knows best: by issuing ever more debt. However, with China’s total debt now estimated at 350% of GDP, it only has a finite amount of time before the debt bubble finally pops as well.

  In other words, for China there is, as of this moment, quite literally no way out, and what’s worse the longer it delay the decision of how it will reset its economy, the worse it will be for global risk markets.

  

  

  

  

  

• What If Obama Believed In Individual Liberty & Free Markets?

  Submitted by Richard Ebeling via EpicTimes.com,

  President Barack Obama delivered his final State of the Union address on January 12, 2016, and devoted most of the time to defending his “legacy” of bigger and more intrusive government, with an emphasis on the other aspects of personal and social life he wished could come under the blanket of more political paternalism, if only there was enough time before he leaves office on January 20, 2017.

  But suppose that, instead, Obama had had an epiphany shortly before he spoke before the Congress on January 12^th. Imagine that he had had a realization that the Progressive and political paternalistic ideas that he has believed in, espoused and implemented during his first seven years in the office of the presidency had been wrong and misguided.

  What if he had discovered the ideas, say, of Ayn Rand, Henry Hazlitt, Milton Friedman, and F. A. Hayek, for example? Suppose that he realized that the true principles of a free society were to be found in the ideas and ideals of individual rights and liberty, free markets and competitive enterprise?

  What if the president offered, instead, an agenda for freedom rather than one of paternalism? What would the State of the Union address be like if he had such an epiphany for defending individual liberty rather than more unrestricted government license over our lives?

  Let us imagine what he might have said, instead of the words he actually spoke:

  “My fellow Americans, I come before you tonight to deliver my seventh and last State of the Union address at a time of continuing economic uncertainty and social tensions across our great nation.

   

  “I have spoken to you more than once about the country’s need for ‘hope and change.’ But I now realize that we must look for that hope and change in a far different direction that the one I’ve talked about and argued for in previous years.

   

  

   

  The Free Individual and His Creative Mind

   

  “I was wrong a couple of years ago when I said that the man who owns a business did not ‘make it.’ I assumed that improvements in the human condition only result from the actions of the ‘collective,’ as if the ‘collective’ was a living, breathing, thinking being, separate from the individuals who make up the society.

   

  “I now understand and appreciate from reading Ayn Rand that ‘society’ is merely a sometimes convenient, but often confusing, shorthand for the resulting outcomes of the interactions and associative actions and activities of individual human beings. There is no ‘society’ independent from the thinking, valuing and acting individuals in the world.

   

  “And, furthermore, if anything is built its possibility can and only does begin as a creative thought and idea in the mind of a real, distinct individual man or woman. The ‘idea’ must precede the ‘deed,’ and the idea only can come from an individual human mind. There is no collective brain.”

   

  “My fellow Americans, you do not exist to live and work for ‘society.’ You have a right to your own life, to live it as you think right and best for yourself, through peaceful, honest and productive work. The achievements of ‘society’ are the outcome of voluntary and mutually beneficial exchanges and associations among free men.

   

  “Our Founding Fathers understood this when they signed the Declaration of Independence and promulgated the U.S. Constitution. Man and his rights precede government, and government’s role in society is not to control or direct the actions of men, but to secure and protect their individual rights to life, liberty and honestly acquired property.

   

  Freedom and Knowledge

   

  “Starting tomorrow, I am instructing Treasury Secretary Jack Lew to prepare a set of budget proposals, the goal of which will be a balanced budget before the end of the current fiscal year. And not through raising taxes, but through across-the-board cuts in government spending.

   

  “If we are to restore a thriving and fully employed economy in America it will require getting resources out of the wasteful hands of government, and back under the control and guidance of the private and productive citizens whose work, saving, investment and creativity are the only basis and source of our improving standard of living.

   

  “I now understand that economic growth and opportunity only come from freeing the minds of every American so all may benefit from what others may know. I have learned from F. A. Hayek that it has been a great arrogance on my part and practically everyone else in government for a very long time to believe that we can know enough to direct and plan the actions of multitudes of people in an ever-more complex society.

   

  “All the knowledge of how, where and when to do things that make ‘society’ work and creatively improve cannot be known by any one person or group of people in Washington, D.C. The ‘knowledge of the world’ is dispersed and decentralized among all the minds of all the people in society. We must appreciate that the free market is not only a market place of goods, but of ideas that result in the producing of those goods.

   

  “Government regulations, restrictions, prohibitions, subsidies and plans get in the way of the competitive process that is a great vehicle of ‘discovery’ to find out who, in fact, can creatively imagine and bring to market the new and better products, in greater quantities and lower prices that benefit all in society – especially the poor and less well-off who, year after year, gain from more and less expensive goods available and within their modest economic reach.

   

  “It has been a great ‘pretense of knowledge’ on my part to presume that I, as president of the United States, can know who might ‘win’ the market ‘race’ of competitive improvement and excellence before allowing the process of market competition to serve as the motive and incentive for people to discover within themselves what they are capable of doing and producing.

   

  

   

  Unintended Consequences and the Minimum Wage

   

  “I know that many who have supported me over the years will be wondering how I could turn my back on all those who have looked to me as the great hope for ‘social justice’ and ‘fairness’ in society. Do I no longer care about the poor, the underprivileged, and the needy?

   

  “I now understand after reading Henry Hazlitt that much that seems to be helpful government policy in the short-run can have longer run negative consequences for many of the very people we sincerely wish to help. We must look beyond what is immediately ‘seen’ to what is ‘unseen': the impact of these policies when we look past today to see the effects they will have tomorrow.

   

  “For that reason, rather than calling for an increase in the government-mandated minimum wage, I will be proposing to the Congress the abolition of the federal minimum wage law. I will also be highly recommending that the various state governments should abolish their minimum wage statutes, as well.

   

  “None of us pays more for anything than we think it is worth, in terms of its value to us and what we can afford to spend. And if something goes up in price, we often think twice before we continue to buy as much of it as we have in the past. We ask ourselves, ‘Is it really worth that higher price, and is it worth buying less of other things to keep buying as much of it as we’ve bought before, because the extra expense to purchase the same amount will have to come out of buying less of something else, since our limited financial means only go so far?’

   

  “The only source of an employer’s financial means to pay his workers their wages is the revenues he receives from the customers who buy his product. If the government mandates that he must pay his workers a minimum wage above the market wage, he will have to decide if the value of what some of those workers contribute to make those products that help him earn that consumer revenue is now less than what the government says he must pay them. If he finds that some of them are not worth the minimum wage he will let them go, and other new jobs that he might have offered will not be financially worth opening up.

   

  “Thus, many of the very people – the poor and low-skilled – who can most benefit from an entry level job that offers them on-the-job training, experience and a chance to have their feet on the first rung of the ladder to a better life, will be denied that opportunity because the government minimum wage law prices them out of the market.

   

  “I sincerely care too much about those people to leave them possibly permanently behind due to such a misguided and counterproductive policy as our minimum wage law.”

   

  Free Markets and Real Opportunity

   

  “We must appreciate, as reading Milton Friedman has taught me, that the free competitive market is the ‘great leveler’ that frees people from the artificial barriers to entry and opportunity that only government controls and regulations can place in the way of the poor and less well off from rising out of poverty and low standards of living.

   

  “A free society of free people will always be a society of unequal outcomes. Each of us is a unique and distinct individual from the rest of humanity. That is the reason we should respect each individual’s right to his own life and liberty, since he or she is ‘one of a kind,’ never to be seen again on the face of this planet. We should respect and value them, and not presume to tell them how they should live their only sojourn on this earth. Their life is too precious, if indeed we value ‘the person,’ as we say we do, to make them a slave to how we think they should live.

   

  “But because we all possess degrees of uniqueness in our inborn differences, our inclinations and desires, and our drive and determinations to set and try to achieve goals in our life, the resulting outcomes will be different in various ways from that of others.

   

  “It is also the case that how we find ways and decide to earn a living is valued differently by our fellow men. Thus, how much we may earn in the market place is to a great extent a result of by how much our fellow human beings value the services we can offer them in exchange for what we wish to buy from them in the arena of free, competitive trade.”

   

  

   

  Freedom and Benevolence

   

  “Does that mean that those who are less well off than ourselves may not need and deserve a ‘helping hand’? All people of good will and benevolence might rightly have a sense of assisting those who they think deserve and may benefit from such support.

   

  “But such good will and benevolence cannot be forced or made either ‘moral’ or ‘right’ by compelling a false philanthropy through government coerced redistribution of wealth. It not only undermines a proper and rightly human sense of concern for one’s fellow men, but leads to many wasteful and misdirected uses and abuses of the taxpayer’s hard-earned money.

   

  “For this reason, I will be proposing over the last year of my presidency the repeal of the Department of Health and Human Resources, as well as the Departments of Education, Housing and Urban Development, Labor, Commerce, Transportation, Energy and Agriculture.”

   

  Free Markets for Better Health Care

   

  “This now gets me, my fellow Americans, to the hardest policy decision I am going to propose to Congress in the current session. I came into office with the hope and dream of assuring affordable health care to each and every American. I even took pride when my opponents began to call the Affordable Care Act, ‘ObamaCare.’

   

  “I call upon the Congress to immediately repeal the Affordable Care Act. Everything that I have now learned from reading Hayek, Hazlitt, Friedman and Rand has taught me that turning over the health care industry and medical service to the regulatory and planning control of the government will lead to nothing but disaster for the nation.

   

  “We do need better health care, at more affordable rates and prices, with improved coverage. But that can only come by freeing those creative minds of the market place in a setting of the most open competition as is possible. We must set loose the same competitive discovery process that has given all those other innovative miracles of more, better and less expensive goods and services over the years and decades.

   

  “Deregulation of the medical profession and deregulation of the health insurance industry must be our new policy. Individuals should be free to decide and choose their own health plans and trade-offs, and the unrestrained profit motive must be taken advantage of to incentivize the offering of health insurance coverage and medical care quality improvements.

   

  The Right to Ignore the State

   

  “My fellow Americans, in closing let me just say that I also read the nineteenth century social philosopher of freedom, Herbert Spencer, and he has taught me is that as long as any one of you lives your life peacefully and honestly in your own affairs and in your social and market dealings with others, the government has no moral right to make any claim upon you.

   

  “In other words, you have a ‘right to ignore the state,’ other than when it goes about its proper and limited business in securing and protecting the rights of each and every citizen from the violent and plundering acts of others.

   

  “This is the real and only reasonable agenda for ‘hope and change’ that can bring our country freedom, prosperity and goodwill among all of our people.

   

  “There is, of course, much more that we should do and can do to bring about that change for the better. That is why between now and when I leave office next year on January 20, 2017, I will be putting together proposals to repeal the powers of the NSA, bring all our troops home from around the world and call upon the Congress to abolishthe Federal Reserve System so we can move to a private, competitive banking system with a honest, market-based money such as gold.

   

  “I think that the agenda for freedom, based on individual liberty, free markets and limited government that I have presented this evening can serve as a good beginning to return to the wonderful vision that our Founding Fathers hoped for when they established our great nation.

   

  “Thank you, my fellow Americans, and may God Bless a reborn, truly free America.”

  Barack Obama, of course, did not give such a speech to the country in his State of the Union address. But one can hope that some day there will be a president who will have been elected precisely to articulate and initiate such an agenda for individualism, liberty, and limited government in the United States.

  

  

  

  

  

• BoJ Preview: "The Need For A Kuroda Bazooka Is Growing"

  With The Fed definitely off the table, China promising nothing but daily liquidity drips, and Europe unable to do anything but jawbone, the world's bullish equity market investors are anxiously trawling for a central bank to save the world. Tonight's BoJ meeting could well be it – though judging by their past epic failures – it will be anything but successful as QE23 looms in Japan. “The need for a Kuroda bazooka is increasing,” said Yuji Shimanaka, an economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “This is decision time for Kuroda” as additional stimulus can stop the trend of yen gains and falling stocks.

  Market participants’ views on the BOJ are mixed, but leaning increasingly toward more stimulus as Japan’s growth is sputtering and inflation, at 0.3% year on year as of November, is way below the BOJ’s 2% target.

  

  Weak exports, production and stagnant consumption weighed on growth in the fourth quarter. Despite a negative month-on-month reading for Japan’s industrial output in November, production still may have expanded in the fourth quarter, though likely not enough to offset a 1.2% drop in the third quarter. Companies’ production plans signal that the outlook for a stronger first quarter remain.

  However, just as wih The Fed, despite uninspiring growth data, positive dynamics in the labor market — the basis for the BOJ’s optimism on the price outlook — remain in place.

  

   

  Given Kuroda’s history of surprising observers, the spectrum of potential outcomes is very broad. As Bloomberg reports,

  While only six of 42 economists surveyed by Bloomberg are predicting that Kuroda’s board will expand already-record stimulus this time, others didn’t rule that out. Twenty-nine expect further easing by mid-year. Citigroup Inc., JPMorgan Chase & Co. and UBS Group AG economists are among those giving additional stimulus at this meeting a more than 30 percent chance.

   

  Since the BOJ’s last meeting in December, oil prices fell to a 13-year low, the yen touched a one-year high, stocks have tumbled about 10 percent this year and the outlook for faster wage growth has waned.

   

  All of these things are obstacles to the BOJ hitting the 2 percent inflation target by its goal of around the six months through March 2017. The bank could announce a change to the timing of the target Friday.

   

  And one possible wild card: If stimulus isn’t expanded, look for language that hints at the potential for an unscheduled policy move ahead of the next meeting, which won’t be until March 14-15. The BOJ has a new schedule for 2016, and no longer has a February meeting.

   

  Friday’s meeting is the first at which the board will release the outlook report at the same time as the policy decision, which could delay the release past the typical window of between noon and 12:30 p.m. in Tokyo. Later decisions in the past were often associated with policy shifts, but that may not be the case this time.

  If the board stands pat, observers would expect the yen to climb and Japanese stocks to tumble in the immediate reaction.

  

  But that could shift, if the BOJ signals it will be watching financial markets continuously for signs of damage to the domestic outlook and will be ready to act at any time. Kuroda could emphasize that message in his 3:30 p.m. press conference — though that would be after the close of stock trading in Tokyo.

  “The need for a Kuroda bazooka is increasing,” said Yuji Shimanaka, an economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “This is decision time for Kuroda” as additional stimulus can stop the trend of yen gains and falling stocks.

  Whether the BOJ pushes back the timing of reaching the 2 percent price target and if so by how much will be a key gauge to assess BOJ’s optimism or pessimism.

  The BOJ now forecasts hitting the inflation target around the six months through March 2017. People familiar with discussions at the BOJ told Bloomberg last week that they are considering a delay in the schedule for a third time in less than a year.

   

  If the target is postponed to some time in fiscal 2017, that points to an increasing risk for not achieving it by the end of Kuroda’s term in April 2018, according to Hideo Hayakawa, a former BOJ chief economist. If the inflation target holds firm without further stimulus, that will be an indication that Kuroda remains more optimistic than most.

   

  The key is how Kuroda views the impact of the recent moves in the yen and Japanese stocks, along with concerns about China’s slowdown on Japan’s inflation expectations and corporate investment and wage plans. The economy is growing at about its potential, so it comes down to assessing confidence and whether he thinks a move Friday would strengthen sentiment.

   

  The BOJ also will update its forecasts for economic growth and prices for the first time since October. Hayakawa forecast that the bank will cut the inflation projection to about 1 percent for the year starting in April from 1.4 percent.

  The big question though, as Bloomberg notes, is Will Kuroda Adopt Draghi-Style Communication?

  Masaaki Kanno, the chief Japan economist at JPMorgan, and UBS’s Daiju Aoki say Kuroda may indicate further easing is coming soon as European Central Bank President Mario Draghi did last week. Also, the Fed added a line in its statement this week to say it’s closely monitoring global economic and financial developments.

   

  By adopting the Draghi style, Kuroda could avoid disappointing the markets and buy some time as he examines the impact of stock and yen turbulence on Japan’s economy.

  However, given the market's lackluster response to Draghi's promise, it appears markets are demanding action not words.

  But even actions have not helped, as Alhambra's Jeff Snider previously noted, there is scarcely a block of the calendar since the “impossible” global panic in 2008 that hasn’t seen any of them doing something to expand their balance sheet or impress the “time-axis.”

   By my more conservative count, qualified as the BoJ doing something different rather than purely expanding or extending something already in progress, there have been 10 QE’s in Japan but using the numerical standard which has been applied to the Federal Reserve there may have been as many as 22 or more.

   

   

  

   

   

  This is not so much investing or even finance as it is a cult (calling it a religion or even ideology is unjustifiably too charitable). That is the usefulness of “deflationary mindset” not so much as a matter of actual economic pathology but as a built-in, squishy appeal to “we’ll get it right next time.” And there is always, always a next time which doesn’t seem to count for much inside the cult when, in fact, it is everything.

  *  *  *

  But still investors await tonight's BoJ statement for any buying opportunity because this is the farce that the new normal has become.

  

  

  

  

  

• Saudi Arabia Conducted 119 Airstrikes Against Civilian Targets In Yemen, UN Panel Finds

  In March, Saudi Arabia’s air campaign in Yemen will enter its second year.

  Riyadh began flying combat missions last year in an effort to rollback the Iran-backed militiamen who drove Yemeni President Abd Rabbuh Mansur Hadi into exile. The results of the strikes have been mixed. The Houthis were driven from Aden but the fight for Sana’a is far from over.

  And while the Saudis and the Houthis battle it out, ISIS and al-Qaeda are doing what they do best: finding opportunities amid the chaos. Just today for instance, ISIS claimed responsibility for a car bomb that exploded outside of Hadi’s residence in Aden. Hadi was unharmed but six people were killed in the attack.

  As you might recall, the Saudis have a rather checkered human rights record. Earlier this month, the kingdom carried out its largest mass execution in 25 years, killing 47 in what Riyadh pitched as a crackdown on “terrorists.”

  That rather blatant disregard for human life has carried over into the air campaign in Yemen.

  As we’ve documented extensively, Riyadh’s warplanes have “accidentally” hit everything from MSF hospitals to wedding parties and just last week, we brought you the following footage of what Yemen Health Ministry spokesman Dr. Nashwan Attab called a “heinous massacre” involving an ambulance and rescue workers.

  Now, a 51-page report from a UN panel of experts on Yemen has revealed “widespread and systematic” attacks on civilian targets by Saudi planes.

  The report (which was obtained by The Guardian) says the following: 

  “The panel documented that the coalition had conducted airstrikes targeting civilians and civilian objects, in violation of international humanitarian law, including camps for internally displaced persons and refugees; civilian gatherings, including weddings; civilian vehicles, including buses; civilian residential areas; medical facilities; schools; mosques; markets, factories and food storage warehouses; and other essential civilian infrastructure, such as the airport in Sana’a, the port in Hudaydah and domestic transit routes.”

   

  “The panel documented 119 coalition sorties relating to violations of international humanitarian law.”

  And it gets worse:

  “Many attacks involved multiple airstrikes on multiple civilian objects. Of the 119 sorties, the panel identified 146 targeted objects. The panel also documented three alleged cases of civilians fleeing residential bombings and being chased and shot at by helicopters.”

  And worse:

  The coalition’s targeting of civilians through airstrikes, either by bombing residential neighbourhoods or by treating the entire cities of Sa’dah and Maran as military targets, is a grave violation of the principles of distinction, proportionality and precaution. In certain cases, the panel found such violations to have been conducted in a widespread and systematic manner.”

  And worse:

  “Alongside ground-led obstructions to humanitarian distribution, the panel documented 10 coalition airstrikes on transportation routes (both sea and air routes), four road supply routes and five storage facilities for holding food aid (including two vehicles carrying aid and three warehouses and facilities storing food), along with airstrikes on an Oxfam warehouse storing equipment for a water project funded by the European Union in Sana’a. The panel also documented three coalition attacks on local food and agricultural production sites.”

  So let’s see if we’ve got this straight. Over the course of 119 discrete sorties, Saudi Arabi bombed refugee camps, weddings, civilian cars, buses, people’s homes, hospitals, schools, mosques, residential neighborhoods, an Oxfam warehouse, treated “entire cities as military targets,” and chased after fleeing civilians with attack helicopters.

  Not to put too fine a point on it, but that’s laughably bad – it’s just about the most egregious account of human rights abuses one could possibly imagine. 

  “Human rights groups and the Labour leader, Jeremy Corbyn – who described the leaked report as disturbing – called for an immediate inquiry and a suspension of arms sales to Saudi pending its outcome,” The Guardian notes, adding that “UK arms sales to Saudi Arabia totalled £2.95bn for the first nine months of 2015, and about £7bn since Cameron took office, including a contract for 72 Eurofighter Typhoon jets.”

  

  Of course it’s not just Britain arming the Saudis. 

  In December, the US State Department approved $1.29 billion in arms sals to Riyadh including 13,000 precision guided weapons. 

  According to the kingdom, those weapons will help the Saudis avoid collateral damage. “We used precision bombs in the beginning, but the stocks dwindled and we got no resupply,” NPR quotes a Saudi businessman with links to the royal family as saying. “We know we have a problem, but we must prosecute the war.”

  “You can imagine them saying to everybody that is criticizing them, ‘Look, if we have better weapons, there will be less casualties,’ ” Ford M. Fraker, president of the Middle East Policy Council and a former U.S. ambassador to Saudi Arabia, said last month. “I think that is probably correct, but I think the whole issue of [collateral damage] is not one you are going to eradicate.”

  No it isn’t. Especially not when the Saudis are shooting at civilians.

  

  

  

  

  

• Deutsche Bank Eliminates Management Bonuses After "Horrible," "Grim" Results

  “These are extremely poor results,” Citi’s Andrew Coombs wrote last week after Deutsche Bank CEO John Cryan announced a “sobering” set of numbers for 2015.

  By “sobering,” Cryan meant a net loss of more than $7 billion. It was the first annual loss since the crisis and was capped off by a Q4 loss of €2.1 billion which included €1.2 billion in litigation fees.

  Revenues missed estimates by 11% and fell 16% Y/Y but that in and of itself “fails to explain €0.7bn of the underlying miss,” Citi’s Coombs continued.”It would appear that the bank has also been forced to book elevated credit losses during the quarter.”

  Citi is also looking for some €3.6 billion in additional litigation charges this year.

  On Thursday we got a look at the full results for Q4 and the picture is, well, quite ugly.

  Investment banking was a nightmare, as revenues plunged 30% in corporate banking and securities where provisions for credit losses jumped from just $9 million in Q4 2014 to $115 million. For the year, provisions rose to $265 million versus $103 million for 2014. Deutsche blamed “valuation adjustments in Debt Sales & Trading, a challenging trading environment, and lower client activity” for the decline in revenues. Fixed income and equities revenue fell 16% and 28% during the period, respectively.

  

  “Another pressing question is if the Deutsche investment bank model is in structural decline,” Citi’s Coombs wrote today, after parsing the results. “FICC was down -8% yoy in 4Q15 (vs US peers +4% yoy) [and while] management argues there is no structural deterioration, this remains to be seen.”

  BofAML’s Richard Thomas called the trading numbers “horrible” and the overall results “grim.” “We think that the bank is in for another difficult year in that guidance is that ‘2016 peak restructuring year’,” Thomas said, adding that “it looks like revenues are under a lot of pressure, yet adjusted costs are guided to be flat with another €1bn of restructuring costs.”

  
  

  “In fairness to John Cryan, he signaled that re-orientating the investment bank will have a revenue impact so we shouldn’t be too surprised about that,” Neil Smith, an analyst at Bankhaus Lampe with a buy recommendation on the stock told Bloomberg.

  For his part, John Cryan is sorry both for the performance and for himself because as it turns out, he won’t be getting a bonus and neither will the rest of the firm’s top management. 

  “It would be inappropriate vis-à-vis society to post €5.2bn in legal provisions in one year and not reflect that in compensation, particularly when the share price has fallen, and shareholders have suffered,” he said, explaining why members of the management team will not receive bonuses for 2015. “By and large, I think we are underpaying against our international peer group this year and I hope that many staff understand why.”

  We’re sure they understand why. The results are terrible. How long the staff will stay if they aren’t getting paid is another matter entirely. 

  “Although no one wants to contribute to leading a company when the cost of joining the management board is a diminution in possible compensation, in the context of the overall performance of the bank last year . . . that’s a decision which I respect,” Cryan added.

  Deutsche said litigation costs would be “less than 2015,” which isn’t saying much given that the bank shelled out some €5.2 billion last year paying for the shenanigans of years past. 

  As for whether the bank will ultimately have to raise capital, Citi says that’s a distinct possibility. Here’s why:

  We view the leverage ratio as the binding capital constraint for Deutsche. The current 3.5% is well below peers and the company’s own 4.5% target. Post restructuring & litigation charges and a Postbank divestment at 0.6x P/TB, we estimate a pro-forma leverage ratio of c3.3%. This implies a c€15bn shortfall, of which we expect part to be met by underlying retained earnings and part via AT1 issuance. However this still leaves an equity shortfall – we see a c4% leverage ratio by end-2017 – which is likely to necessitate a capital increase of up to €7bn in our view. In addition we note the target CET1 ratio of >12.5% only allows for a 0.25% management buffer above the fully-loaded SREP requirement. This provides the company with limited flexibility especially if BaFin were to introduce a counter-cyclical buffer (max 2.5% add-on).

  So as it turns out, it’s much harder to turn a profit when you stop cheating as much and when you are forced to fork over billions for all of the cheating you used to do.

  It certainly looks as though Cryan’s bid to overhaul the investment banking side may be far too little far too late, so don’t be surprised to see the equity trading in the single digits by year end.

  Oh, and about that dividend; Cryan says it’s not coming back until 2017 “at the earliest.”

  

  

  

  

  

• For Amazon, The Only Chart That Matters

  For all the traders and hedge fund managers who are under 30, Amazon has been here before, and not just once: a place where the company’s growth prospects – perceived as virtually boundless – were put into question, leading to a collapse in the soaring stock price.

  Indicatively, putting the company’s “valuation” in context, AMZN is now trading at a PE of roughly 460x, which compares to 87x during the last peak in the summer of 2008.

  But what matters for Amazon has never been earnings: it was always top line growth (the company generated $107 billion in sales in 2015 and less than a billion in net income) and multiple expansion (or contraction).

  Putting all that together we get the following chart courtesy of IceFarm Capital: 16 years of sales growth since the first dot com bubble superimposed on top of AMZN’s multiple expansion (or contraction). In the latest quarter, worldwide net sales growth once again took a leg lower despite AMZN now employing over a quarter million workers!

  But the real question is what will the market do: will it continue giving AMZN’s multiple the benefit of the doubt, and let it grow at its recent torrid pace – a pace we have seen many times before – or will the market sniff out that as a result of the global growth slowdown the time to exit has arrived, and lead to an outcome we have also seen many times before, when AMZN’s multiple growth suddenly went into reverse sending the stock price plunging as a result.

  If the answer is yes, watch out below.

  

  

  

  

  

  

• Gold, Political Instability, & Why QE Was The Worst Thing In The World

  Submitted by Jared Dillian via The 10th Man, MauldinEconomics.com,

  Long before I started writing for Mauldin Economics, I was a gold bull.

  A mega-gold bull.

  This started in 2005. I was making markets in ETFs at the time, and as head of the ETF desk at Lehman Brothers, I signed the firm up to be one of the early authorized participants in the SPDR Gold Shares fund (GLD). I was pretty excited.

  It may seem quaint now, but at the time, there really wasn’t an easy way to invest in gold outside of coins or bars (high transaction costs, cumbersome) or futures (high barriers to entry). Physical gold, of course, is preferable, but you can’t really trade it, per se.

  So I bought some GLD in 2005, bought more, bought more, bought more in 2008 with veins popping out of my neck, and was caught massively long in 2011.

  I figured, oh well, it’s just a correction, I’ll ride it out. Except I didn’t know that it was going to be a 40+% drawdown and last five years. If I’d had that knowledge, I probably would have sold.

  But my investment thesis on gold hadn’t changed.

  Let me explain.

  Why Gold

  When the financial system was melting down in 2008, I predicted (possibly before anyone else) that Ben Bernanke would conduct unconventional monetary policy: quantitative easing. In retrospect, it wasn’t a hard call. He basically said he was going to do it in a 2002 speech.

  I remember the day. The long bond rallied nine handles.

  Anyway, that’s when the veins popped out of my neck, because I said all this printed money was going to slosh around the financial system and cause hyperinflation. Of course, I wasn’t the only one saying this, but I was saying it pretty loudly.

  Never happened. All that money never ended up sloshing around—it ended up deposited as excess reserves back at the Fed. Years later, people theorized that quantitative easing actually caused the opposite to happen: deflation.

  Anyhow, in finance, it is okay to be right for the wrong reasons. Gold went up for three more years, the best-performing asset class, even though the underlying thesis was totally wrong. There was no inflation whatsoever. Eventually, gold got the joke as sentiment turned, and you know what the last five years have been like.

  The Weimar Experience

  When the gold bugs start talking about hyperinflation, they usually start talking about Weimar Germany, probably the best-documented example of a situation where inflationary psychology took hold.

  I don’t want to rehash the whole story here, but basically, post WWI, the League of Nations saddled Germany with a bunch of war reparations it could not possibly ever repay. In the end, though, Germany did repay—with printed money.

  The funny thing about inflation is that it is always fun at first. Weimar Germany boomed for a couple of years, before the inflation began to get out of control. Ultimately, the deutsche mark collapsed, replaced by the rentenmark, which was actually backed by something of tangible value: land.

  The ensuing financial collapse brought about political instability, which led to the rise of Hitler, and you know the story from there.

  Now, clearly that hasn’t happened in the US, and it isn’t likely to happen. We did not get inflation… of goods and services. Interestingly, though, we got inflation of financial asset prices. Stocks and bonds went up, as well as real estate—even art. Great, but as you know, not everybody owns stocks, usually only people with some money to invest.

  So as all the research shows, the rich have gotten richer, and the poor have gotten poorer. Inequality has increased massively, which has brought about political instability, which will lead to… who, as president, exactly?

  Perish the thought.

  Anyway, whether gold goes up or down, I continue to assert that printing money is absolutely the worst thing a central bank can do. Even under the best of circumstances, the unintended consequences are colossally bad. Even now, the Fed is just getting around to acknowledging the fact that QE might have actually caused wealth inequality.

  There are those who will always say, “What, was the Fed supposed to do nothing? What do you think would have happened?”

  An unimaginably bad depression. Then, the best recovery ever. And nobody would be mad at each other.

  Gold Is Bouncing

  You can’t deny the price action. Over the last few weeks, it is positively buoyant. If I were short, my butt cheeks would be tightening up.

  I’m starting to develop a theory, which is crazy, but then again… it might not be entirely crazy. You can help me decide.

  Maybe gold is starting to price in some of this political instability. Maybe it is starting to price in a Sanders or Trump presidency.

  After all, if Bernie Sanders were to become president, he would double the debt overnight

   

  If it were Trump, probably the same thing—we are talking about a guy who has spent his entire career screwing creditors.

  This increases the possibility, however remote, of debt monetization. Also, populists are great for gold prices.

  Like I said, maybe not so crazy. Regardless of whether gold goes up or down, or if you think gold bugs are total idiots, it makes sense (for a lot of portfolio theory reasons) to have it as part of your portfolio.

  Sometimes a bigger part than others.

  

  

  

  

  

• Saudi Arabia Hemorrhages $19.4 Billion In Reserves During December

  Saudi Arabia – which was busy playing headline hockey with Russia this morning over a rumored 5% production cut proposal – is running out of money.

  Yes, we know, that sounds absurd. But believe it or not, the country whose monarch recently rented the entire Four Seasons hotel for a 48 hour stay in Washington DC, is in fact going broke. And at a fairly rapid clip.

  The problem: slumping crude. As we first discussed in November of 2014, Riyadh’s move to kill the fabled petrodollar in an effort to bankrupt the US shale complex was a risky proposition. If ZIRP kept US producers in the game longer than the Saudis anticipated, crashing crude could end up blowing a hole in the kingdom’s budget – especially if Iranian supply came back on line and added to the supply glut.

  Fast forward a 14 months and that’s exactly what’s happened. US production is down but not wholly out (yet) and the Iranians are adding 500,000 barrels per day in output in Q1 and 100,000,000 per day by the end of the year.

  Compounding the problem is the war in Yemen (which will enter its second year this March) and the cost of providing subsidies for everyday Saudis.

  All of this has conspired to leave Riyadh with a budget deficit of 16%. That’s expected to narrow in 2016 but at 13%, will still be quite large. Make no mistake, if crude continues to sell for between $30 and $35 per barrel, 13% will probably prove to be a rather conservative estimate.

  “This is a quantum leap in all aspects,” Abdullatif al-Othman, governor of the Saudi Arabian General Investment Authority, told a conference convened this week to study ways for the kingdom to cut spending and shore up the budget. Here’s Reuters:

  Stakes in the operations of big state companies, including national oil giant Saudi Aramco, would be sold off; underused assets owned by the government, such as vast land holdings and mineral deposits, would be made available for development.

   

  Parts of the government itself, including some areas of the national health care system, would be converted into independent commercial companies to improve efficiency and reduce the financial burden on the state. The number of privately run schools would rise to around 25 percent from 14 percent.

   

  Meanwhile, the government would use its massive financial resources to help diversify the economy beyond oil into sectors such as shipbuilding, information technology and tourism, by awarding contracts to new firms and providing finance.

   

  Fadl al-Boainain, a prominent Saudi private-sector economist who attended the conference, said he welcomed officials’ emphasis on developing parts of the economy that had long been neglected because of the focus on oil.

   

  But he added: “The overall economic situation does not support the great optimism that ministers expressed, and it does not support the indicators they referred to.

  Meanwhile, the market is betting that the pressure will ultimately force the Saudis to abandon the riyal peg. Keeping the currency tethered to the dollar is yet another drag on the country’s finances and all in all, the kingdom saw its FX reserve war chest dwindle by more than $100 billion through November.

  That’s what we mean when we say the monarchy is going broke.

  In December, the bleeding continued unabated. Data out today from SAMA shows the Saudis blew through some $19.4 billion last month, as the war chest shrank to $608 billion. 

  

  Thanks to the fact that the composition of the SAMA piggybank is a state secret, we don’t know how much of the drawdown was USTs, but it’s safe to say some US paper was sold.

  As a reminder, the IMF estimates that if current market conditions persist, the kingdom will have burned through the entirety of their rainy day fund within just five years. 

  Here’s BofAML’s analysis of the SAMA stash and how long Riyadh can hold out under various assumptions for crude prices and borrowing.

  

  So even as the Saudis swear the headlines surrounding a proposed 5% production cut are bogus and even if Riyadh managed to weather the storm slightly better in 2015 than some predicted, the kingdom effectively has two choices: 1) cut production, or 2) drop the riyal peg. 

  Otherwise, King Salman won’t be able to tap SAMA for the money he needs to rent Mercedes S600 fleets – and we can’t have that…

  

  

  

  

  

  

• Moronic Mimicking Minds

  A picture story in four parts from the Slope of Hope:  

   

   

  

   

  

  

  

  

  

  

• Red Ponzi Ticking

  Submitted by David Stockman via Contra Corner blog,

  There is something rotten in the state of Denmark. And we are not talking just about the hapless socialist utopia on the Jutland Peninsula——even if it does strip assets from homeless refugees, charge savers 75 basis points for the deposit privilege and allocate nearly 60% of its GDP to the Welfare State and its untoward ministrations.

  In fact, the rot is planetary. There is unaccountable, implausible, whacko-world stuff going on everywhere, but the frightful part is that most of it goes unremarked or is viewed as par for the course by the mainstream narrative.

  The topic at hand is the looming implosion of China’s Red Ponzi; and, more specifically, the preposterous Wall Street/Washington presumption that it’s just another really big economy that overdid the “growth” thing and is now looking to Beijing’s firm hand to effect a smooth transition. That is, an orderly migration from a manufacturing, export and fixed investment boom-land to a pleasant new regime of shopping, motoring, and mass consumption.

  Would that it could. But China is not a $10 trillion growth miracle with transition challenges; it is a quasi-totalitarian nation gone mad digging, building, borrowing, spending and speculating in a magnitude that has no historical parallel.

  So doing, It has fashioned itself into an incendiary volcano of unpayable debt and wasteful, crazy-ass overinvestment in everything.  It cannot be slowed, stabilized or transitioned by edicts and new plans from the comrades in Beijing. It is the greatest economic trainwreck in human history barreling toward a bridgeless chasm.

  And that proposition makes all the difference in the world. If China goes down hard the global economy cannot avoid a thundering financial and macroeconomic dislocation. And not just because China accounts for 17% of the world’s $80 trillion of GDP or that it has been the planet’s growth engine most of this century.

  In fact, China is the rotten epicenter of the world’s two decade long plunge into an immense central bank fostered monetary fraud and credit explosion that has deformed and destabilized the very warp and woof of the global economy.

  But in China the financial madness has gone to a unfathomable extreme because in the early 1990s a desperate oligarchy of despots who ruled with machine guns discovered a better means to stay in power. That is, the printing press in the basement of the PBOC—-and just in the nick of time (for them).

  Print they did. Buying in dollars, euros and other currencies hand-over-fist in order to peg their own money and lubricate Mr. Deng’s export factories, the PBOC expanded its balance sheet from $40 billion to $4 trillion during the course of a mere two decades. There is nothing like that in the history of central banking—–nor even in economists’ most febrile imagings about its possibilities.

  

  The PBOC’s red hot printing press, in turn, emitted high-powered credit fuel. In the mid-1990s China had about $500 billion of public and private credit outstanding—hardly 1.0X its rickety GDP. Today that number is $30 trillion or even more.

  Yet nothing in this economic world, or the next, can grow at 60X in only 20 years and live to tell about it. Most especially, not in a system built on a tissue of top-down edicts, illusions, lies and impossibilities, and which sports not even a semblance of financial discipline, political accountability or free public speech.

  To wit, China is a witches brew of Keynes and Lenin. It’s the financial tempest which will slam the world’s great bloated edifice of central bank fostered faux prosperity.

  So the right approach to the horrible danger at hand is not to dissect the pronouncements of Beijing in the manner of the old kremlinologists. The occupants of the latter were destined to fail in the long run, but they at least knew what they were doing tactically in the here and now; it was worth the time to parse their word clouds and seating arrangements at state parades.

  By contrast, and not to mix a metaphor, the Red Suzerains of Beijing have built a Potemkin Village. But they actually believe its real because they do not have even a passing acquaintanceship with the requisites and routines of a real capitalist economy.

  Ever since the aging oligarch(s) who run China were delivered from Mao’s hideous dystopia by Mr. Deng’s chance discovery of printing press prosperity, they have lived in an ever expanding bubble that is so economically unreal that it would make the Truman Show envious. Any rulers with even a modicum of economic literacy would have recognized long ago that the Chinese economy is booby-trapped everywhere with waste, excess and unsustainability.

  Here is but one example. Somewhere near Shanghai some credit-crazed developers built a replica of the Pentagon on 100 acres of land. This was not intended as a build-to-lease deal with the  PLA (People’s Liberation Army); its a shopping mall that apparently has no tenants and no customers!

  

  One of the more accurate things I have ever said is that the USA’s Pentagon was built on a swampland of waste. That is, I do take my anti-statist viewpoint seriously and therefore firmly believe that the Warfare State is every bit as prone to mission creep and the prodigious waste of societal resources as is the Welfare State and the bailout breeding backrooms of Washington.

  But our Pentagon at least has a public purpose and would return some benefit to society were its mission to be shrunk to honestly defending the homeland. By contrast, China’s “Pentagon” gives waste an altogether new definition.

  Projects like the above—–and China is crawling with them—–are a screaming marker of an economic doomsday machine. They bespoke an inherently unsustainable and unstable simulacrum of capitalism where the purpose of credit is to fund state mandated GDP quota’s, not finance efficient investments with calculable risks and returns.

  Accordingly, the outward forms of capitalism are belied by the substance of statist control and central planning. For example, there is no legitimate banking system in China—just giant state bureaus which are effectively run by party operatives.

  Their modus operandi amounts to parceling out quotas for national GDP and credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages below. There have never been any legitimate financial prices in China—all interest rates and FX rates have been pegged and regulated to the decimal point; nor has there ever been any honest financial accounting either—-loans have been perpetual options to extend and pretend.

  And, needless to say, there is no system of financial discipline based on contract law. China’s GDP has grown by $10 trillion dollars during this century alone——-that is, there has been a boom across the land that makes the California gold rush appear pastoral by comparison.

  Yet in all that frenzied prospecting there have been almost no mistakes, busted camps, empty pans or even personal bankruptcies.  When something has occasionally gone wrong with an “investment” the prospectors have gathered in noisy crowds on the streets and pounded their pans for relief—-a courtesy that the regime has invariably granted.

  Indeed, the Red Ponzi makes Wall Street look like an ethical improvement society. Developers there built an entire $50 billion replica of Manhattan Island near the port city of Tianjin—– complete with its own Rockefeller Center and Twin Towers—– but have neglected to tell investors that no one lives there. Not even bankers!

   

  

  

  Stated differently, even at the peak of recent financial bubbles in London, NYC, Miami or Houston  they did not build such monuments to sheer economic waste and capital destruction. But just consider the case of China’s mammoth steel industry.

  It grew from about 70 million tons of production in the early 1990s to 825 million tons in 2014. Beyond that, it is the capacity build-out behind the chart below which tells the full story.

  To wit, Beijing’s tsunami of cheap credit enabled China’s state-owned steel companies to build new capacity at an even more fevered pace than the breakneck growth of annual production. Consequently, annual crude steel capacity now stands at nearly 1.2 billion tons, and nearly all of that capacity—-about 65% of the world total—— was built in the last ten years.

  Needless to say, it’s a sheer impossibility to expand efficiently the heaviest of heavy industries by 17X in a quarter century.

  

  This means that China’s aberrationally massive steel industry expansion created a significant increment of demand for its own products. That is,  plate, structural and other steel shapes that go into blast furnaces, BOF works, rolling mills, fabrication plants, iron ore loading and storage facilities, as well as into plate and other steel products for shipyards where new bulk carriers were built and into the massive equipment and infrastructure used at the iron ore mines and ports.

  That is to say, the Chinese steel industry has been chasing its own tail, but the merry-go-round has now stopped. For the first time in three decades, steel production in 2015 was down 2-3% from 2014’s peak of 825 million tons and is projected to drop to 750 million tons next year, even by the lights of the China miracle believers.

  The fact is, China will be lucky to have 500 million tons of true sell-through demand—-that is, on-going domestic demand for sheet steel to go into cars and appliances and for rebar and structural steel to be used in replacement construction once the current one-time building binge finally expires. That’s just 40% of its massive capacity investment.

  And it is also evident that it will not be in a position to dump its massive surplus on the rest of the world. Already trade barriers against last year’s 110 million tons of exports are being thrown up in Europe, North America, Japan and nearly everywhere else.

  This not only means that China has upwards of a half-billion tons of excess capacity that will crush prices and profits, but, more importantly, that the one-time steel demand for steel industry CapEx is over and done. And that means shipyards and mining equipment, too.

  That is already evident in the vanishing order book for China’s giant shipbuilding industry. The latter is focussed almost exclusively on dry bulk carriers——-the very capital item that delivered into China’s vast industrial maw the massive tonnages of iron ore, coking coal and other raw materials. But within in a year or two most of China’s shipyards will be closed as its backlog rapidly vanishes under a crushing surplus of dry bulk capacity that has no precedent, and which has driven the Baltic shipping rate index to historic lows.

   

  

   

  Total orders at Chinese shipyards tumbled 59 percent during  2015, according to data released by the China Association of the National Shipbuilding, meaning that demand for plate steel from China’s mills will plunge in the years ahead.

  That’s why on Sunday the Beijing State Council made a rather remarkable announcement. To wit, it will close 100 million to 150 million tons of steel-making capacity. That would mean cutting capacity by an amount similar to the total annual steel output of Japan, the world’s No. 2 steel maker, and nearly double that of the US.

  These are not simply gee whiz comparisons. It took the fastidious Japanese nearly five decades to erect the world’s leading steel industry on the back of tens of thousands of step-by-step engineering and operational improvements. China created the same tonnage each and every year after the financial crisis, but it was all based just on a great field of dreams exercise in pell mell expansion. Efficiency. longevity and steel-making technique were hardly an afterthought.

  Nor is its own tail the only loss of market. Even more  fantastic than steel has been the growth of China’s auto production capacity. In 1994, China produced about 1.4 million units of what were bare bones communist era cars and trucks. Last year it produced more than 23 million mostly western style vehicles or 16X more.

  And, yes, that wasn’t the half of it. China has gone nuts building auto plants and distribution infrastructure. It is currently estimated to have upwards of 33 million units of vehicle production capacity. But  demand has actually rolled over this year and will continue heading lower after temporary government tax gimmicks—– that are simply pulling forward future sales—–expire.

  The more important point, however, is that as the China credit Ponzi grinds to a halt, it will not be building new auto capacity for years to come. It is now drowning in excess capacity, and as prices and profits plunge in the years ahead the auto industry CapEx spigot will be slammed shut, too.

  Needless to say, this not only means that consumption of structural steel and rebar for new auto plants will plunge. It also will result in a drastic reduction in demand for the sophisticated German machine tools and automation equipment needed to actually build cars.

  Stated differently, the CapEx depression already underway in China, Australia, Brazil and much of the EM will ricochet across the global economy. Cheap credit and mispriced capital are truly the father of a thousand economic sins.

  China’s construction infrastructure, for example, is grotesquely overbuilt—— from cement kilns, to construction equipment manufacturers and distributors, to sand and gravel movers, to construction site vendors of every stripe. For crying out loud, in three recent year China used more cement than did the United States during the entire 20th century!

  That is not indicative of a just a giddy boom; its evidence of a system that has gone mad digging, hauling, staging and constructing because there was unlimited credit available to finance the outpouring of China’s runaway construction machine.

   

  

  The same is true for its machinery, solar and aluminum industries—to say nothing of 70 million empty luxury apartments and vast stretches of over-built highways, fast rail, airports, shopping mails and new cities.

  In short, the flip-side of the China’s giant credit bubble is the most massive malinvesment of real economic resources—-labor, raw materials and capital goods—ever known. Effectively, the country-side pig sties have been piled high with copper inventories and the urban neighborhoods with glass, cement and rebar erections that can’t possibly earn an economic return, but all of which has become “collateral” for even more “loans” under the Chinese Ponzi.

  China has been on a wild tear heading straight for the economic edge of the planet—-that is, monetary Terra Incognito— based on the circular principle of borrowing, building and borrowing. In essence, it is a giant re-hypothecation scheme where every man’s “debt” become the next man’s “asset”.

  Thus, local government’s have meager incomes, but vastly bloated debts based on the collateral of stupendously over-valued inventories of land—-valuations which were established by earlier debt financed sales to developers.

  Likewise, coal mine entrepreneurs face not only collapsing prices and revenues, but also soaring double digit interest rates on shadow banking loans collateralized by over-valued coal reserves. Shipyards have empty order books, but vast debts collateralized by soon to be idle construction bays. Speculators have collateralized massive stock piles of copper and iron ore at prices that are already becoming ancient history.

  So China is on the cusp of the greatest margin call in history. Once asset values start falling, its pyramids of debt will stand exposed to withering performance failures and melt-downs. Undoubtedly the regime will struggle to keep its printing press prosperity alive for another month or quarter, but the fractures are now gathering everywhere because the credit rampage has been too extreme and hideous.

  It is downright foolish, therefore, to claim that the US economy is decoupled from China and the rest of the world. In fact, it is inextricably bound to the global financial bubble and its leading edge in the form of red capitalism.

  Bubblevision’s endlessly repeated mantra that China doesn’t matter because it only accounts for only 1% of US exports is a non sequitir. It does not require astute observation to recognize that Caterpillar did not export its giant mining equipment just to China; massive amounts of it went there indirectly by way of Australia’s booming iron ore provinces.

  That is, until the global CapEx bust was triggered by two years of crumbling commodity prices. CAT’s monthly retail sales reports are a slow motion record of this unprecedented crash.

  Thus, December US retail sales tumbled 10% over last year, following a 5% drop in November. But that was the optimistic part of its global results. Elsewhere December sales by its dealers were a complete debacle: The Asia/Pacific/China region was down by 21%; EAME dropped by 12%; and Latin America (i.e. Brazil) continued its free fall, dropping by 36% versus prior year.

  

  Overall, CAT’s global retail sales posted a massive 16% drop in December compared to prior year—–a result tied for the worst annual decline since the financial crisis. And that comes on top of the 12% decline a year ago, another 9% in 2013, and -1% in 2012.

  Moreover, four consecutive years of declines is not simply a CAT market share or product cycle matter. Its major Asian rivals have experienced even larger sales declines. Komatsu is down, for example, by 80% from its peak sales levels.

  In the heavy machinery sector, therefore, the global CapEx depression is already well underway. There has been nothing comparable to this persisting plunge since the 1930s.

  Likewise, the US did not export oil to China, but China’s vast, credit-inflated demand on the world market did artificially lift world oil prices above $100 per barrel, thereby touching off the US shale boom that is now crashing in Texas, North Dakota, Oklahoma and three other states. And the fact is, every net new job created in the US since 2008 is actually in these same six shale states.

  Indeed, the rot that was introduced into the global economy by the world’s convoy of money printing central banks extends into nearly unimaginable places, owing to the false bubble prices for crude oil and other raw materials that were temporarily inflated by the global credit boom. Thus, the 5.6X explosion of global credit shown below had everything to do with the aberration of $100 per barrel oil and all the malinvestments and whacky distortions it spawned in places which harvested the windfall rents.

  

  To wit, Iraq is now so broke——–notwithstanding a 33% increase in oil exports last year——that it is petitioning the IMF for a bailout. Yet as recently as a year ago plans were proceeding apace to build the world tallest building at its oil country center at Basra.

  That right. The “Pride of the Gulf” now has tin cup in hand and is heading for an IMF rescue. The monstrosity below will likely never be built, but it does succinctly symbolize the trillions that have been wasted around the world by lucky reserve owning companies and countries during the false boom that emanated from the Red Ponzi.

  

  The planned “Bride of the Gulf” building in Basra. At a height of 1,152 meters, it would outdistance even the Jeddah Tower being built in Saudi Arabia.

  Similarly, US exports to Europe have tripled to nearly $1 trillion annually since 1998, while European exports to China have more than quintupled. Might there possibly be some linkages?

  In short, there is an economic and financial trainwreck rumbling through the world economy called the Great China Ponzi. In all of economic history there has never been anything like it. It is only a matter of time before it ends in a spectacular collapse, leaving the global financial bubble of the last two decades in shambles.

  Forget the orderly transition myth. What happens when the iron ore ports go quiet, the massive copper stock piles on the pig farms are liquidated, the coal country turns desolate, the cement trucks are parked in endless rows, the giant steel furnaces are banked, huge car plants are idled and tens of billions of bribes emitted by the building boom dry up?

  What happens is that giant economic cavities open up throughout the length and breadth of the Red Ponzi.

  Industrial profits as a whole are already down 5% on a year over year basis, but in the leading sectors have already turned into read ink. In a few quarters China’s business sector, in fact, will be in the throes of a massive profits contraction and crisis.

  Likewise, tens of millions of high paying jobs, and the consumer spending power they financed, will vanish. Also, the value of 70 million empty apartment units that had been preposterously kept vacant as a distorted form of investment speculation will plunge in value, wiping out a huge chunk of the so-called savings of China’s newly emergent affluent classes.

  So where are all the consumers of services supposed to come from? After peak debt and the crash of China’s vast malinvestments, there will be no surplus income to recycle.

  Most importantly, as the post-boom economic cavities spread in cancer like fashion and the crescendo of financial turmoil intensifies, the credibility of the regime will be thoroughly undermined. Capital flight will become an unstoppable tidal wave as the people watch Beijing  lurch from one make-do fix and gimmick to the next, as they have during the stock market fiasco of the past two years.

  In short, China will eventually crash into economic and civil disorder when the Red Suzerains go full retard with governance by paddy wagons, show trials, brutal suppression of public dissent and a return to Chairman Mao’s gun barrel as the ultimate source of communist party power.

  Self-evidently, the Maoist form of rule did not work. But what is now becoming evident is that Mr.. Deng’s printing press has a “sell by” date, too.

  

  

  

  

  

• This $250,000 Caterpillar Bulldozer Can Be Yours For The Low, Low Price Of $55

  After today’s CAT earnings, in which the company not only announced a steep drop in revenues, profits and cash flow but also obliterated its guidance, cutting the midpoint of the 2016 revenue range (set just three months ago) from $45.5 billion to $42 bilion, it should have become clear to everyone just how bad the company’s income statement is.

  But what about its balance sheet and specifically that $10 billion in inventory? We got a glimpse back in November when we showed how at an auction in Australia, CAT loaders, excavators and tractors, with MSRPs in the millions, were selling for sub-pennies on the dollar, or as low as $15,000 for a machine that was originally sold for $2.9 million.

  The post quickly went viral and while many readers were impressed by the collapse in demand (as reflected by the auction prices) for CAT equipment, some wished they too could participate in the bidding process: after all, what better way to make an impression on one’s neighbors than to take a leisurely stroll down the street in a bulldozer, especially if its costs virtually nothing.

  To all readers who wrote us complaining about this, you are in luck.

  Below we present a Caterpillar D6T Bulldozer, a machine which has a “new” MSRP of over a million dollars, and which with over 5,000 hours of use, sells through reputable dealer channels, for around $250,000 each.

  

   

  Or, as the case may be, does not sell because while $250,000 is well below the MSRP, it is clearly still too high for that occasional leisurely drive around the neighborhood. Or for any other purpose for that matter.

  But what about $50?

  Because that is what the bid is on the exact same dozer (one which has even less total use, or just 3680 hours) currently offered for sale on Proxibid, where with 20 hours left until the end of the auction, $50 is all someone is willing to spend for this heavy machinery marvel.

  

   

  Here are some more photos of the gorgeous, barely used machine you could be the proud owner of for the low, low price of $55.00

  

  

  

  

  

  

  

  

  

   

  Cherry on top: the high-end audio system comes included in the price.

  

   

  What are the terms of the auction? Well, what you buy is pretty much what you get “as is.” But surely there is a catch, like $249,950 shipping? Well no – you just have to go to Louisiana and pick it up.

  But what if $50 feels too rich for this bulldozer? There is always this $10 Komatsu may be more up your alley.

  

  Perhaps a bulldozer is not what you need: then how about this $110 Volvo excavator?

  

  Or maybe neither a bulldozer nor an excavator is your cup of tea? That’s fine: judging by these (lack of) bids, nobody else has an urge to splurge either.

  Which brings us to our original question: if a bulldozer which retails new for over $1 million, can not sell via official channels For 250,000 and has a true price discovery in the hundreds if not tens of dollars, what does that suggest about i) the true mark on Caterpillar’s $10 billion in Inventory, and ii) the losses that CAT’s banks are starting at if they ever are forced to liquidate the “collateral” that backs their loans?

  Source: Proxibid

  

  

  

  

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